Aaron Lynch
Does a market have a memory? That is a question that we could spend forever trying to resolve. The first part to the puzzle is to establish if a market remembers what it has done in the past; the next step is to determine what does it do with that information?
Well, I like to make it a little simpler. Markets do possess a memory, but mainly from the perspective of its participants. If smart, the traders remember what is possible and what can occur in the future. Many believe that the current situation with oil prices is brand new and that we are in new territory. Well, I agree to the most part, as the geo-political landscape is very different to what we have seen in the last century. However, oil has always been susceptible to movements based on supply and demand and this basic economic condition is affected by war and instability with the global community.
We have entered record prices and a period of high uncertainty, but there is commonality with the past, which is why we see similar ranges repeating be it over shorter time frames. I very much subscribe to David Bowden’s view that markets are quickening in comparison to when Gann traded last century.
So how does this apply to the current pull back on oil? A theme that is growing in the press is that the current dip in prices relates to the US releasing massive reserves into the market to artificially reduce prices before the congressional elections in November. Anything is possible and OPEC is threatening to cut production in the short term to balance price out at around $60 a barrel. I feel this area is a key one and will be a guide for the next 3 – 6 months as a bench mark to higher or lower levels in price.
I feel that with all the factors in the current situation late December through to January of 2007 will be an interesting area to watch for major turns. It’s important to note I am a more of a bull than a bear long term in this market, but from a traders sense markets moving higher or lower do not really concern me as long as it presents trading opportunities.
Let’s take a look at the quarterly chart on oil and compare the current bearish pullback to other bear moves in history to see if this technique can provide a guide to support and resistance levels? Does this market have a memory of its previous moves?
Chart 1 –CL-Spot1 Quarterly Bar Chart
click chart for more detailI have referenced the last 4 major pullbacks on oil since it began trading on the NYMEX exchange in New York. The dollar value of the pullback is circled and the percentage fall is highlighted above. The tendency for this market to fall around the $21-$23 amount has been proven, however the percentage fall in the current move is significantly smaller than the previous corrections. That being said I believe that markets do remember significant numbers and seeing the range $21.18 and the previous cycle at $21.10 so close together, indicates a place to look for some support in the near term. However, in percentage terms this market has proven it can fall as much as 69% of its value and quickly, however, these previous outcomes were driven by significant world events and the while they can be around the corner its hard to see a fall of this magnitude in the short to medium term.
Gann stated in his materials that getting to know numbers will serve you well in understanding markets and where to look for significant turns. His basic premise of history repeating is well documented and the current pullback looks very similar to the 2000 into 2001 as the ranges are practically identical, however the time it has taken is very different but that’s another story.
Good Trading
Aaron Lynch